Sears' stumbles a surprise

Becky YerakTribune staff reporter

Sears, Roebuck and Co. reported a "disappointing" $61 million loss for the third quarter and warned its year-end numbers would fall short of earlier forecasts--surprise announcements that drove the retailer's stock price down almost 9 percent on Thursday.

Casting blame on everything from record fuel prices to heavy merchandise markdowns to disruptive store renovations, Sears lost 29 cents a share in the third quarter, compared with a profit of 52 cents a share in the same period last year. Investors were counting on the nation's biggest department store chain to earn a penny a share, according to a Thomson First Call analyst survey.

As Sears' enters its fourth year of falling sales, Chief Executive Alan Lacy has been under increasing pressure to deliver better results, and he warned investors won't see them next quarter.

"Based on our sales and margin performance over the past two quarters, coupled with a more cautious holiday outlook ... we believe it's appropriate to lower our fourth-quarter sales and margin assumptions," Lacy said. Hoffman Estates-based Sears has taken pains to improve its merchandise offerings and store presentation. That's particularly critical since Sears sold its profitable credit card business in 2003 and now depends solely on its struggling retail operation. Same-store sales, which are those at stores open at least one year, were down 4 percent from the year-earlier period.

"We really thought we had valid reasons for expecting a better performance in the third quarter, but what we got was awful," said Retail Forecasting President Kurt Barnard. "Sears needs a credible strategy, or even tactics, that will prevent a recurrence of this kind of performance."

Lacy, meanwhile, "is on the spot," Barnard noted.

Lacy, a former chief financial officer who was named Sears' CEO in 2000, acknowledged that third-quarter sales were soft across most of Sears' key businesses, including the preppy Lands' End clothing line that Sears bought in 2002 to improve its apparel sales.

Another retail observer was less charitable, calling Sears' results a "debacle" and raising comparisons between Sears and J.C. Penney Co. Both retailers are largely mall-based, middle-brow department store chains. But Penneys has a narrower array of products and has a CEO who came up through the merchandising, not finance, ranks.

"The first question is, `Who is accountable?' Penneys hired a merchant to get the pricing right, the product right and the promotions right. Sears has a financial man," said Howard Davidowitz, chairman of New York retail consulting firm Davidowitz & Associates. "The results are predictable."

Under Lacy, Sears has reconfigured several departments, including electronics and bed and bath products. That tinkering, while intended to improve sales over the long run, was "more disruptive than we originally anticipated," Lacy said.

Even when the tweaking ended, the sales boosts weren't as hefty as Sears expected, he conceded.

Also, in some instances, Sears had to mark down merchandise to clear out inventory before it rearranged the sales floor. Markdowns in apparel, which Sears has struggled with for years, were particularly deep.

"Management at Sears has been slow to get serious about doing whatever they have to do to be a competitive retailer" of such lines as apparel and bed and bath products, said Richard Hastings, retail analyst for Bernard Sands LLC.

Sears has been expanding its presence away from shopping malls by buying freestanding stores from Kmart Holding Corp. and Wal-Mart Stores Inc. It also has made a spate of new hires, prompting Prudential Equity analyst Wayne Hood to publicly ask Sears whether it is biting off more than it can chew. Lacy responded that 2005 will probably be a "less intense" year for Sears than 2004 or even 2002.

Some results, however, were encouraging, Lacy said, citing sales of certain proprietary Kenmore products and certain lawn and garden goods.

Sales for Sears' trendier Apostrophe apparel line are up 15 percent. The early response has been "quite good" to A/Line, a Jones Apparel Group Inc. women's line for which Sears has exclusive rights, as well as Structure, a men's line that Sears bought from Limited Brands. Sears also is "very pleased with the initial customer response" of online apparel sales that began last month.

Aside from its earnings problems, Sears' balance sheet is in good shape, S&P confirmed.

In July, Sears launched a search for a new executive--president of retail--to oversee all store operations. He or she would be a possible heir to Lacy.

But in August Sears hired former Target Corp. executive Luis Padilla to oversee marketing and merchandising. Sears said then that it was in no rush to fill the retail president's role.

Thursday, Lacy was asked whether Sears still intends to fill the post. "That position still makes sense to be filled at some point," Lacy said, but Sears has upgraded its management team in recent years. Plus, with Padilla on board, "we're in no rush right now given his arrival."

Sears expects fourth-quarter sales to be flat. For the year, it expects to earn $1.46 to $1.66 a share, including some special charges and depreciation. The average estimate from Thomson First Call was $2.67.

Lacy told analysts Thursday that there was "still much more work to be done" in making Sears more productive, including additional automation of back-office jobs inside stores.